Cross-border PE: The ASEAN angle

If we were to consider the Association of Southeast Asian Nations (ASEAN) as glue being used to bind the region together, it has yet to harden. And while many are happy to endorse the benefits of a unified trading bloc incorporating over 600 million people and $2.5 trillion in GDP, others are equally willing to identify the potential flaws. This is a 10-strong group of economic extremes - running all the way from Singapore, one of the world's richest economies, to Myanmar, one of the poorest - and sometimes profound cultural and political differences.

ASEAN is a work in progress, as are a fair number of the private equity investments we are told will capitalize upon integration. The concept has been around more than four decades but the blueprint for an economy community dates back to 2007. This community will start to be phased in from 2015.

Policy landmarks aside, the region is already considerably closer in economic terms than ever before. And short of a political black swan, there is no turning back; it would mean trying to hold off the forces driving globalization. ASEAN's GDP more than doubled in size between 2005 and 2012. Trade did double, reaching $2.47 trillion in 2012, with one quarter of that intra-ASEAN trade. Foreign direct investment (FDI) has nearly tripled in value over the same period and intra-ASEAN FDI has risen nearly five-fold.

For private equity, it is a case of identifying and effectively targeting an addressable market. A portfolio company will increase in value through cross-border expansion but this doesn't necessarily involve a pan-ASEAN strategy; it is quite possible that exposure to three or four of the big five - Indonesia, Malaysia, the Philippines, Singapore and Thailand - will suffice.

They key to success is appreciating the local nuances in each market, even while leveraging the economies of scale that might come from sourcing as a regional operator.

Speaking to AVCJ last year, The Abraaj Group's Aman Lakhaney highlighted Crossland Logistics, a Thailand-based transportation player and a portfolio company since 2012. Crossland was in the process of completing bolt-on acquisitions that will take it into Malaysia, Singapore and Vietnam - no doubt riding the wave of intra-ASEAN trade - but each market requires a different approach, based on local partners, regulations and language.

For Navis Capital Partners, the challenge in creating an Indonesian presence for Malaysia-based Alliance Cosmetics was more esoteric. First, it had to establish whether a consumer brand indigenous to one country could be rolled out in another. Similarities in skin tone and dress sense between the target demographics in Malaysia and Indonesia and the likely appeal of the products' halal ingredients to Indonesia's Muslim population were plus points. Second, Alliance had to make a breakthrough in local branding and distribution. Brand ambassadors with cross-border appeal helped.

It is possible to pick holes in the ASEAN small print, typically that policymaking hasn't been matched by implementation in certain areas, but private equity firms with regional expansion plans are probably more vulnerable to invisible barriers. The very local wrinkles - a regulatory quirk or a specific consumer preference - can be difficult to iron out without on-the-ground expertise.

Another company to have achieved a degree of regional scale, and in double-quick time, is VC-backed taxi-booking app GrabTaxi. An idea that came out of Havard Business School's 2011 business plan contest, it is now a very real presence in 15 cities across Southeast Asia. Local knowledge and local teams are required for each new roll-out, but the company is helped by a degree of continuity: Most of GrabTaxi's senior representatives in each market were recruited through the Harvard network.

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• Topics
• Southeast Asia
• Investments
• Southeast Asia
• Economy
• buyout
• Growth capital